Aug. 15 (Bloomberg) -- Wachovia Corp., the fourth-largest U.S. bank, agreed to buy back $9 billion of frozen auction-rate securities and pay a $50 million fine to settle state and federal claims that it misled investors about the debt.

Wachovia will repurchase the securities, including $5.7 billion from individuals, charities and small businesses, under a settlement with a group of states led by Missouri and the U.S. Securities and Exchange Commission. The accord follows similar settlements from banks including UBS AG and Citigroup Inc. and brings to more than $50 billion the amount of buybacks offered.

``Today's agreement in principle underscores our desire to ensure that clients who purchased ARS at Wachovia receive the liquidity they need,'' Wachovia Chief Executive Robert Steel said in a statement. The Wachovia accord covers more than 40,000 investors, Missouri Secretary of State Robin Carnahan said in a statement.

Wachovia is the fifth bank in the past two weeks to settle with regulators in a nationwide investigation of how auction- rate securities were marketed. The agreement puts pressure on Merrill Lynch & Co. and other firms still negotiating with regulators over the securities, which were advertised as safe as cash until the $330 billion market collapsed.

Charge, Writedown

Wachovia will take a $275 million pretax charge because of higher legal costs in the third quarter, after taking a similar $500 million writedown in the second quarter. The impact of the settlement and higher legal reserves will trim its Tier 1 Capital ratio, a measure of a bank's ability to absorb losses, by 8 basis points. A basis point is 0.01 percentage point.

Wachovia ``didn't have any choice,'' said Gary Townsend, a former bank analyst and co-founder of Hill-Townsend Capital Management in Chevy Chase, Maryland. ``When everyone else is settling, there is no place to hide.''

Auction-rate securities are typically bonds with interest rates reset by periodic bidding. Banks and securities dealers that ran the auctions abandoned their routine role as buyers of last resort in mid-February, allowing the market to implode.

Wachovia lost 24 cents to $15.57 at 4:15 p.m. in New York Stock Exchange trading. The shares have declined 59 percent this year.

Prior Settlements

JPMorgan Chase & Co. and Morgan Stanley agreed yesterday to buy back more than $7 billion in auction-rate securities and pay fines totaling $60 million, according to New York Attorney General Andrew Cuomo, who announced the settlement. The two banks agreed to buy back the debt from individuals, charities and small businesses over the next five months, Cuomo said.

Merrill faces an ``imminent'' lawsuit from New York because the brokerage's settlement offer isn't satisfactory, Cuomo said during a press conference today. The New York-based firm last week offered to repurchase about $10 billion of the securities.

New York has subpoenaed about 25 firms involved in sales of auction-rate securities, including those that have already settled, Cuomo said.

Wachovia's purchases of auction-rate securities from its individual and small-business clients will start by Nov. 10 and conclude by Nov. 28, the company said. Investors who sold the securities between Feb. 13 and today will be reimbursed for any loss by Nov. 28.

Pushed to Settle

UBS and Citigroup last week said they would redeem about $26 billion of the auction-rate securities and pay fines of a combined $250 million.

``I'm not sure that we would have ever gotten to this point but for the interest of the media and attorneys general who investigated this,'' said Andrew Chamberlin, a Greensboro, North Carolina attorney whose Lutheran church invested $500,000 in auction-rate securities through UBS. The church, First Lutheran of Greensboro, can request a refund starting Oct. 31, under the settlement with UBS.

Regulators have sought auction-rate buyback programs for retail customers including individuals, reimbursement for consumers forced to sell securities at ``below-par'' prices and relief for institutional investors. Under the UBS settlement, businesses with more than $10 million in UBS accounts can't seek recovery until June 30, 2010.

Costs stemming from the settlement make it likely that Wachovia will raise capital through a common stock sale ``sooner rather than later,'' Townsend said. ``This settlement comes at an unwelcome time where they are otherwise having to de-lever.''

Wachovia's securities unit had 14,632 brokers and client assets of $1.11 trillion as of June 30, ranking third among U.S. brokers behind New York-based banks Merrill and Citigroup. Charlotte, North Carolina-based Wachovia's securities division is based in St. Louis.

To contact the reporters on this story: Karen Freifeld in New York State Supreme Court in Manhattan at kfreifeld@bloomberg.net; David Mildenberg in Charlotte, North Carolina, at dmildenberg@bloomberg.net.

Last Updated: August 15, 2008 17:32 EDT